• Keep BUY, new MYR2.56 TP from MYR2.76, 13% upside. 1HFY23 (Jun) results were above expectations on higher interest income and profit shared from a JV. We believe Coastal Contracts is a beneficiary to Pemex’s expansion plan to ramp up production. Given the group’s proven track record, we believe it will be able to clinch a few more contracts.

• 1HFY23 results exceed expectations. On the basis of a completed JV share transfer, Coastal’s recorded core profit of MYR149.6m accounted for 73% and 70% of our and Street’s full-year forecasts.

• Results review. 1HFY23 core earnings increased to MYR149.6m (>100% YoY) due to interest income earned from the loans granted to a JV and higher JV share of profit. 2QFY23 revenue rose 20% QoQ to MYR62.4m on higher income from the group’s vessel chartering business – driven by elevated OSV and liftboat charter income. However, 2QFY23 core profit decreased 9.2% QoQ to MYR71.2m from MYR78.4m, attributed to the lower recognition of the EMC Papan Plant. We expect more contributions to come in 2HFY23. As the group is in midst of transferring its 50% equity interest in Coastoil Dynamic SA De CV – a JV with Grupo Empresarial Alfair SAPI De CV – we expect a cumulative one-off loss on the disposal of effective interest in the JV (MYR127.7m as of 1HFY23) in 4QFY23.

• Update and outlook. The EMC Papan Plant is now in the commissioning phase. To date, management said c.USD120m (out of USD220m) of the EPC payment has been collected, and it is expecting to receive the rest in 2HFY23. For the group’s outlook, Coastal guided that it is currently tendering for the EPC of an oil separation plant with a capacity larger than Papan Plant. It is also to be located in the Ixachi field. We believe Coastal has a high chance of winning the contract, given the completion of its two gas plants in the same field. However, regarding the third Ixachi gas conditioning plant, management guided that the tender has been delayed by about six months because Pemex is focusing on drilling more wells.

• Earnings estimates. Post results, we increase our FY23F-25F earnings by 46.2-21.2% to account for a higher net margins from the EMC Papan Plant and higher interest income. Our new TP is lowered to MYR2.56 as we roll forward our valuation base year (pegged to 9x FY24F P/E, at its 5-year mean). Note: FY24 earnings will see a drop due to the absence of the EPC contributions from EMC Papan Plant. However, there is potential upside from Coastal securing more contracts. We ascribe a 2% ESG discount to our TP given its 2.9 score, which is below the country’s median.

• Downside risks: Contract terminations by Pemex, slower-than expected progress billings, and higher-than-estimated opex.

Source: RHB Research - 1 Mar 2023